If you’ve been paying attention over the past year, you’ve noticed that regulators and those in Washington are placing increased scrutiny on IRA rollovers.
Are advisors chasing rollover dollars without bothering to consider whether they are appropriate for clients? In some cases, most assuredly yes, but IRA expert Ed Slott said that the SEC and FINRA not only want to stop rollover abuses, they want advisors to become educated on the options available to workers who are either retiring or shifting jobs.
“I’d say over 90% of advisors” don’t know the six options available to workers “because mostly they [advisors] begin their careers as salespeople,” and “because advisors are not trained on the tax rules—all they know is a rollover,” Slott told me in a recent interview.
Regulators “are concerned that participants aren’t being given all of their options” regarding what they can do with their retirement dollars, he said.
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Slott also sees a dire picture for those advisors who don’t beef up their knowledge about helping their clients—particularly boomers—enter the distribution phase of their retirements: outright loss of those clients and a failure to bring on new ones.
Capturing boomers’ rollover dollars—which is estimated to be in the trillions—is the “opportunity of a lifetime” for advisors, he said. Boomers, as opposed to their parents, are much more educated on their options, Slott said he’s found in the many consumer seminars that he conducts. “I get well-educated questions—as a matter of fact, better questions—from boomers than I do from advisors.”
Boomers Less Loyal to Advisors?
Because boomers are also less loyal than their parents, they won’t stick with an advisor who hasn’t done his research. “Boomers are willing to break a 20-year relationship with an advisor” if that advisor can’t take them into the distribution phase, Slott said. “Maybe they had an advisor who made them some money while they were accumulating, but now they are looking ahead to retirement and to the distributing phase, and they want to make sure they have the right advisor for that phase. Boomers are very willing to move to an advisor that has knowledge in that area.”
Cerulli Associates recently released data showing that IRA rollover contributions in the United States surpassed $321.3 billion at the end of 2012, an increase of 7.3% over the previous year, with a “large portion” of the contributions coming from defined contribution plans.
In 2013, rollovers rose even further to $357.7 billion, an 11.3% increase, Cerulli estimated in its not-yet-finalized 2014 study.
Of the six choices available to workers when leaving a job—an IRA rollover, leave it in the company plan or roll to a new company’s plan, take a lump-sum distribution, make a Roth conversion or an in-plan Roth conversion—Slott said that the right choice depends on the participant’s circumstances, but “the best option is still usually the IRA rollover, to be fair to advisors.”
But, he added, “there are situations where you have to ask questions, and this is where advisors need to be better educated on the options.”
There are benefits to keeping the money in the employee’s current plan, “but it depends on the person.” The biggest benefit to leaving it in the plan or rolling to a new plan is creditor protection, Slott said. “But this is where advisors have to do some homework” because creditor protection is determined by state law.
“If you’re in a state like mine, New York, for example, that’s not a problem because New York has creditor protection for IRAs. So it’s up to advisors to know their own state’s IRA and Roth IRA creditor protection status.” A client such as an executive or doctor who’s afraid of getting sued wouldn’t want to roll their 401(k) money, which is protected from creditors, to an IRA that may not be protected under state law.